Stocks Could Be Entering New Era

PEOPLE - LIVING PROOF

Probably the two biggest money puzzlements in the minds of retirees these days are:

*What is the stock market going to do next?

*And how long will my retirement money last?

``Everybody says a correction is coming. Maybe a 3 or 4 percent drop,'' said Norman Marcotte, senior vice president with Merrill Lynch in Leesburg. ``People are a little nervous. But where else are they going to put their money?''

Most of Marcotte's clients are retirees.

On the other hand, Richard Harry, investment adviser with Edward Jones in Mount Dora, told seniors in a recent seminar: ``Eighty percent of all investors - brimming with optimism - don't believe there will be a one-year market decline of 20 percent in the next 10 years.''

People have a habit of investing in what has been their most pleasurable experience.

Goodness knows, we've had plenty of pleasure in the stock market in recent years.

But there's also reason to believe the market is due for an adjustment.

Many stocks have never been more expensive when measured by the traditionally reliable yardstick of price-earnings ratios, which are at nerve-jangling, all-time highs. Then throw dividend yields into the equation. They're at historic lows. Both are caution signs.

``It pays to be selective,'' said Marcotte. ``Buy quality. And remember, even if they drop, markets always come back.''

We're in the fourth year of record leaps in stock prices. How can it last much longer?

Well, we may be in a new era. In fact, it may have begun in 1958 when the dividend yield on the Standard & Poor's 500 stock index dropped below the yield on 20-year government bonds for the first time. Earlier market plunges were set off when dividend yields fell like this. But dividend yields have hung low for decades.

And the stock market is standing on two uplifting statistical pillars - low inflation and high corporate profits.

Stating it a slightly different way, Frank Teachout, senior investment broker with A.G. Edwards & Sons in Eustis, said, ``Unless the economy folds or overheats, the market will undoubtedly continue to roll on, although it has lasted longer than I thought it would.''

On the question of how long your retirement money will last, ``we have to counsel with each individual retiree. How much risk are they willing to take in their investments,'' Teachout said.

He said seniors who are satisfied with a 5 percent return, can stay with certificates of deposit or a money market mutual fund.

Some who are better off and willing to accept some risk can be in variable annuities or quality stocks, he said.

When you invest in stocks, interim losses - at least on paper - are inevitable. After the bear market of 1973-74, it took four years for many investors to recover their losses.

But the range of returns on common stocks, while potentially risky in the short term, almost always pays off in the long term. As Harry pointed out in the seniors seminar, on average, if you hold stocks one year, the chance of making money is 67 percent. But, if held for 10 years, the chance is 96 percent.

So, how do you figure how long your retirement money will last?

Here are some figures to help you estimate. First, although inflation is very low today, let's figure on a 3 percent rate average through the years. With that rate of inflation:

*If you want a return of 6 percent a year (3 percent after inflation) and the earnings on your investment are 5 percent, your money will last a little longer than 20 years.

*If you want a payout of 12 percent, and your investment earns 6 percent every year, your retirement pot will last a little less than 10 years.

*If you have a big enough investment pot and can live on a return of only 4 percent of it yearly (after inflation) and you can get 7 percent on your money, the payout - because the earnings after inflation are equal to payout - will last indefinitely.